I.   The Law Today

            Many states have yet to consider the issue of whether a buyer must show reliance in order to proceed with a claim of breach of express warranty. Two states, however, have considered the issue a number of times, and reached almost polar opposite conclusions. California currently requires reliance as an element of a breach of warranty claim, while New York considers a warranty a bargained for term of the contract. Delaware has occasionally considered the issue, but has not set clear guidance.

A.   California

            1.   Kazerouni v. De Satnick

            In the case of Kazerouni v. De Satnick, the seller, Kazerouni, sued the buyer, De Satnick, for default on the promissory note that financed the deal.[1]However, the buyer argued the default was excused due to a misrepresentation by the seller.[2]The seller had allegedly overstated the monthly receipts and net profits.[3]Prior to closing, the buyer did receive corrected and accurate financial records, and had the opportunity to personally observe the business operations, and as a result the court found that the buyer did not rely on the misstatements.[4]

            Despite the apparent lack of reliance, the seller argued that the misstatement was an express warranty, and under California’s Uniform Commercial Code (“UCC”), reliance is not required.[5]The court rejected this argument, noting that the UCC was only concerned the sale of goods, and while the current case was a sale, a business is not considered a “good” within the context of the UCC.[6]Having no other support for the lack of reliance, the court rejected the buyer’s argument, and for the moment, the premise that reliance is not required to bring a breach of warranty claim.[7]

            2.   Jue v. Smiser

            The case of Jue v. Smiser involved the sale and purchase of a house that the seller represented to have been designed by a specific architect.[8]This representation was initially made in the San Francisco Chronicle,[9]and again in a brochure given to the purchasers during their initial inspection of the home.[10]While the seller attempted to have the buyer disclaiming this representation, specifically because there was no available proof, the buyer refused to sign it.[11]The buyers did, however, conduct their own due diligence, talking to both a historian—who agreed the house was designed by the architect—and the architect’s relative—who confirmed the lack of real evidence.[12]

            After closing, the buyers sued for negligent misrepresentation.[13]The trial court granted summary judgment because the buyers “‘had actual knowledge of all material facts before the close of escrow and nevertheless voluntarily elected to proceed with the purchase of the property in the face of such knowledge.’”[14]The appeals court disagreed. Instead it looked to the standard it had set forth previously: “reliance must be established at the time the initial contract is struck. It is not necessary that a claimant establish continuing reliance until the contract is fully executed in order to maintain an action for damages.”[15]While the court continued to require a form of reliance, the buyer only has to establish it at the time of the initial contract, and does not have to prove it continued throughout the entire process.

            3.   Bagdasarian v. Gragnon

            In 1944, Gragnon purchased a farm from Bagdasarian with cash, a note secured by the farm, and a note secured by the crops.[16]After paying off almost half of the farm-note, the buyer defaulted resulting in a suit to foreclose on the farm and crops, and a counter-suit alleging fraudulent representations.[17]The buyer had represented the quantity of crops expected to be produced during 1944, the expected selling price for each crop, and the amount produced and sold in 1943.[18]However, both representations were materially overstated, and made in order to induce the purchase.[19]The seller’s defense hinged not on the representations, but on the fact that the buyer did not rely on the representations.[20]The buyer had made physical inspections of the farm during the due diligence process.[21]

            The court refused to find that an examination of the property would preclude reliance on the seller’s representations under two circumstances.[22]First, if the physical inspection would not make the truth of the seller’s statement apparent, reliance would still be warranted.[23]Second, if the person making the representation had superior knowledge, or the party relying on the statement is not competent judge the facts without expert assistance, reliance would also be warranted.[24]In the present case, the physical inspection could not have revealed whether the prior year numbers were accurate.[25]Additionally, the buyer, while experience growing other crops, was inexperienced with the crops of this particular farm.[26]        

            Again the courts continue to uphold the requirement of reliance, but distinguish when it can be used as a defense.

[1]           Kazerouni v. De Satnick, 279 Cal. Rptr. 74 872, 872 (Cal. Ct. App., 1991).

[2]           *Id.*at 873.

[3]           Id. at 872.

[4]           *Id.*

[5]           *Id.*at 873.

[6]           *Id.*

[7]           Kazerouni, 278 Cal. Rptr. at 874.

[8]           Jue v. Smiser, 28 Cal. Rptr. 2d 242 (Cal. Ct. App. 1994).

[9]           *Id.*

[10]          *Id.*

[11]          *Id.*

[12]          *Id.*

[13]          *Id.*

[14]          Jue, 28 Cal. Rptr. 2d at 242.

[15]          *Id.*

[16]          Bagdasarian v. Gragnon, 31 Cal. 2d 744, 747 (Cal. 1948).

[17]          *Id.*

[18]          *Id.*

[19]          *Id.*

[20]          *Id.*

[21]          *Id.*at 748.

[22]          Bagdasarian, 31 Cal. 2d at 748.

[23]          *Id.*

[24]          *Id.*

[25]          *Id.*at 749.

[26]          *Id.*